Saudi Oil, OPEC's Ire

Saudi Oil, OPEC's Ire
Saudi King Abdullah wants to bring prices down to ensure long-term demand, but other OPEC ministers disagree
by Stanley Reed
BusinessWeek


It happens almost like clockwork. A few days before the end of every month, marketing executives from Saudi Aramco, Saudi Arabia's national oil company, ring up the likes of ExxonMobil (XOM) and Royal Dutch Shell (RDS), sounding them out about the oil they need and the price they would be willing to pay. The Saudis crunch the numbers, set a price, then call the global customers back to see how much they'd be willing to buy. By the 10th of the following month, customers—there are about 80 in all—are told how much crude they'll actually get.

It's all part of an elaborate dance that goes on continually at OPEC's biggest producer. While the cartel may set production quotas for each member, the Saudis and a few other top suppliers frequently exceed those limits in order to meet world demand. And these days, the dance looks more like a tug-of-war, as the Saudis and their allies in the organization seek to contain crude prices while Iran and others want to keep them as high as possible. Saudi relations with OPEC "depend on where prices are; when prices are too high [the Saudis] side with consumers," says Vera de Ladoucette, senior director of consultancy Cambridge Energy Research Associates in Paris.

WARY OF HIGH PRICES
The tug-of-war is a key factor in the extraordinary volatility in prices lately. After soaring to $147 per barrel this summer, crude plummeted to below $90 in early September. On Sept. 22 it jumped again to $130 as traders scrambled to cover short positions and fretted about the U.S. economy, then fell to $107 as those pressures eased.

Why wouldn't the Kingdom want to squeeze the maximum out of customers? The Saudis have long memories and recall how high prices can cut into consumption; it happened in the 1980s and it's happening again now. Any threat to oil's leading role as a source of energy is a big worry for a country that sits on reserves of some 260 billion barrels. "We are concerned about the permanent destruction of demand," says a senior Saudi official. "Those who buy hybrid vehicles are not going back to SUVs."

OPEC hardliners such as Iran and Venezuela, by contrast, have less oil in the ground and are running short on cash, so they're more interested in maximizing revenues today. Friction within OPEC has been growing because Saudi Arabia has been pumping almost 10% more than its OPEC quota of 8.9 million barrels per day. The Saudis and other Persian Gulf states believe a price of $90 per barrel is about right, while the hardliners don't want to see anything less than $100 per barrel. "The current market is not balanced; it is oversupplied," Iranian OPEC representative Mohammad Ali Khatibi told Reuters.

Talk to the Saudis privately and they often express frustration with OPEC. Saudi negotiators complain that some members come to meetings with rigid political positions that don't take the real world into consideration. And the Saudis dismiss the likes of Venezuela and Iran for talking big without having the oil to back it up. Venezuela can't produce its quota of 2.5 million barrels per day, while Iran struggles to pump its 3.8 million. Only the Saudis have significant unused capacity that they can tap to influence the markets, and they are working to add to this margin.

The conflict flared this summer. Fearing that sky-high prices could blight oil's future, King Abdullah convened a conference of energy ministers and oil executives in the port city of Jeddah on June 22. At the meeting, the Saudis unilaterally announced a 200,000-barrel-a-day hike in production, on top of an increase of 300,000 barrels daily a few weeks earlier, annoying others in the producers' club. Algerian oil minister and current OPEC President Chekib Khelil called reporters to his hotel room to say he saw no need for the Saudi move.

It's clear the Saudis and Khelil don't see eye-to-eye. At a Sept. 9 OPEC conclave in Vienna, the Saudis went along with vague language promising a cut. But after the meeting they put out the word that they didn't feel bound by it. Khelil, meanwhile, held a 4 a.m. press conference at which he said the agreement required OPEC to cut output by 520,000 barrels per day—apparently violating an agreement with the Saudis, who would bear the brunt of any cut, not to mention a specific number.

The Saudis aren't about to abandon OPEC. But when it comes to pumping what the world needs to keep going, they will generally deliver what their customers want even if it goes against other members' wishes—which likely means more conflict in the producers' club. The Saudi production increases, says Christophe de Margerie, CEO of French oil giant Total (TOT), "are a coup de knife in the OPEC system."

Saudi Oil Minister Says “Not Enough Buyers”

Saudi Oil Minister Says “Not Enough Buyers” to Increase Production
By Tom Waterman
April 10, 2008
Oilintel.com

Paris, France - On the sidelines of an international conference in Paris this morning, it was widely reported that Saudi Arabia's Oil Minister Ali Al-Naimi said "there were not enough buyers of oil to justify an increase in oil production, despite high prices."

This is a direct and accurate statement from the Saudi oil minister, but his next comment is even more telling. He said "that if more buyers emerged, then 'we' would sell. But there were no such buyers."

If you have followed OPEC for the past 30 years as we have, you would understand his logic. Frankly, OPEC will sell all the oil it can, if there are willing buyers. The fact is, Al-Naimi should have told reporters what he told VP Dick Cheney recently. He informed Cheney that they have no room to put any increased output. There are not enough buyers for the oil produced by OPEC and non-OPEC producers, much less if more oil was produced.

Other OPEC nations continue to produce, but they won't admit it. Reports that OPEC produced 100,000 bpd less oil in March than in February is a smokescreen. They certainly produced the same or more, they are just storing the excess until the market might need it, which they hope will be later in April or in May as refineries worldwide start gearing up for the summer driving season.

That's the hope. The reality is this self-defeating marketplace is overflowing with crude oil and even in normal times it might take until the end of June to right itself. With today's dynamics, it might not be resolved during the driving season at all.

That's why the Saudis refuse to pump more oil. What the market will not admit is that the reason OPEC did not officially cut production in the second quarter was due to high prices, and how bad the PR would be.

In our weekly editorial meeting, we could not come up with a time when oil fundamentals were as weak as they are today. And we're talking many decades of experience. Oil stored on vessels, all land-based storage facilities bulging, a series of geo-political factors that provide artificial support without ever removing a barrel of oil from the market.

Perhaps it will take the collapse of the U.S. economy, which is on the horizon unless energy and food prices fall, for the U.S. government to radically change and enhance the regulations that govern commodities and speculation. Increasing the cost of speculation will not solve the problem, only forcing out smaller traders. The large financial institutions that have the biggest stake, and are taking billions in profits can afford any increases. The answer is speculative limits on both the exchanges and the companies that manage these speculative funds. They must find a way to limit how much influence these firms have on baseless prices increases for profit.

Commodity markets are all tremendously affected. Grain tightness does not justify the price of corn, wheat, soybeans or other crops to double, triple and quadruple in price. The oil markets are fundamentally weak, yet prices rise. These financial institutions sell the dollar based on perceptions the Fed may keep lowering interest rates, and buy oil as a hedge. The result? A weaker dollar and justification for higher oil prices. If it were not such a dire situation, it would be comical.
Three years ago, a statement similar to the one uttered by the Saudi oil minister this morning would have sent crude oil crashing, by perhaps $1.50 per barrel, which based on the changes in perception and volatility, would mean about $6.00 per barrel today.

These speculative firms keep the cycle of greed alive and growing while at the same time, sending the U.S. economy into a death spiral. I wish I were exaggerating, but I'm not. I just won't use the "D" word just yet. We were using the "R" word in October, 2007.

IEA Cuts Oil Demand Forecast

IEA Cuts Oil Demand Forecast as High Prices Curb Use
By Bill Murray
Nov. 13 (Bloomberg)

The International Energy Agency, the adviser to 26 oil-consuming nations, cut its forecast for global demand for the rest of this year and 2008 as prices near $100 a barrel slow consumption in the U.S., Europe and Japan.

Global demand next year will be 87.69 million barrels a day, the IEA said today in its monthly report, 300,000 barrels a day less than its previous estimate. The Paris-based agency reduced its estimate for the fourth quarter by 500,000 barrels a day, to 87.14 million barrels.

The IEA has cut its fourth-quarter forecast three times since August on expectations higher gasoline prices and an economic slowdown in the U.S. will restrain demand in the world's largest energy consumer. Federal Reserve Chairman Ben S. Bernanke said last week the U.S. economy is likely to ``slow noticeably'' this quarter.

``We are certainly seeing a downward revision for 2007 and 2008, and high prices starting to have an effect,'' Lawrence Eagles, chief author of the monthly report, said.

``Consumer spending on transportation fuel in the U.S. is reaching the type of levels in the 1980s'' when inflation- adjusted prices were at similar levels, he said in an interview.

India, China

Oil prices have risen 53 percent this year on surging demand from developing countries led by China and India. Futures reached a record $98.62 a barrel in New York on Nov. 7. Chinese and Indian demand for crude could create a supply ``crunch'' as soon as 2015, the IEA said in a separate report last week.

``The whole fact that we've approached $100 has created a scare for some people,'' said Michael Davies, an energy analyst with Sucden (U.K.) Ltd. in London. ``The underlying fundamentals are that we're expecting tighter markets through 2015.''

Oil demand in the U.S. will be slower than previously expected next year as near-record fuel prices and a slumping housing market depress consumer spending, the IEA said.

Still, while the rapid increase in global prices this year has affected demand, especially in the U.S., ``it is too soon to believe that significant structural changes have taken place to make this lower level of demand permanent,'' the report said.

Stockpiles Fall

Industry stockpiles in the world's most developed economies fell 29.5 million barrels in September to 2.6 billion barrels. Global inventories are 113.9 million barrels lower than a year and Japanese crude stock levels are at their lowest in at least 20 years, the report said.

``The warning flags on demand are out there and we're not into the winter yet,'' said Mike Wittner, a commodities analyst with Societe Generale in London. ``Even with the revisions the IEA has made, the market still expects stock draws into the winter and the first quarter, and that's what the market is keying on.''

In addition, half of the world's growth in oil demand is in China and the Middle East, where consumers benefit from government fuel subsidies, the report said.

Chinese oil demand is expected to remain ``strong,'' driven by economic growth, while rising oil revenue in the Middle East mean that subsidies are ``more easily financed and unlikely to be removed,'' the IEA said.

OPEC Call

The ``call on OPEC,'' an estimate by the IEA of how much crude is needed from the Organization of Petroleum Exporting Countries to balance global markets, was reduced by an average 400,000 barrels a day for 2008 to 31.3 million barrels a day, in part because of lower demand in the world's most developed economies.

The IEA cut its estimate of non-OPEC oil production for 2007 by 35,000 barrels a day to 50.1 million barrels a day, and left unchanged its estimate for 2008 at 51.2 million barrels a day on supply from the U.S., Canada, Brazil and Russia.

Production of crude oil from OPEC's 12 members, including new member Angola, rose 410,000 barrels a day in October to an average 31.2 million barrels a day, the IEA estimated, with half the increase coming from Iraq and Angola.

Crude output from Saudi Arabia, OPEC's largest member, rose 100,000 barrels a day last month, to 8.57 million barrels a day, while Iraqi supply gained 120,000 barrels a day to 2.3 million barrels a day, the highest since April 2004, the IEA said.

Excluding Angola and Iraq, which are exempt from OPEC's output targets, the producer group pumped 27.15 million barrels a day last month, a gain of 195,000 barrels daily. OPEC spare capacity slipped in October to 2.46 million barrels, the report said.